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Scotland

Marketing

Pre-Brexit, a German sub-threshold AIFM („AIFM“) can market an AIF in the UK, however, a German sub-threshold AIFM cannot benefit from a pan-European marketing passport. Sub-threshold AIFM’s are partially exempted under UK FCA rules.

Marketing for AIFM Directive („AIFMD") purposes means any offering or placement of shares/units in AIF's at the initiative of the AIFM or on behalf of the AIFM to or with EU investors. The AIFMD introduced a European Passport under which full scope AIFMs can manage and market AIFs throughout the European Union (the „EU Passport"). However, sub-threshold/small AIFMs cannot rely on this Passport.

The German AIFM marketing the AIF in the UK will also be subject to the UK financial promotion rules, in particular, the AIF can only be offered to certain types of investors such as investment professionals, high net worth and sophisticated investors unless such financial promotion is approved by an authorised/exempt person. These are not the only exemptions but the most relevant in the circumstances. The sub-threshold AIFM can limit its communications to fall outside UK financial promotion restrictions, if at all times it markets from outside the UK, and in the following circumstances:

  1. Solicited Real Time Communications would be acceptable with the additional provision that the AIFM does not have a permanent place of business in the UK; or
  2. A non-real time communication to a ‘previous overseas customer’. If the AIFM has done business with an overseas customer within the previous 365 days; and that person was at the time of the business transaction:
    • Neither resident in or had a place of business in the UK; or
    • If the AIFM had on former occasions done business (i.e. effected or arranged a transaction outside the UK) of the same description as that which he is currently promoting, and at that time the overseas person was neither resident or had a place of business in the UK; or
  3. An unsolicited real-time communication to ‘previously overseas customers’ (‘POC’) if:
    • Based on the previous service /or transaction the POC could reasonably expect to be contacted about the current investment activity; and
    • The POC must have been informed on an earlier occasion of the following:
      1. Loss of protections under UK Financial Services and Markets Act (‘FSMA’) for this type of communication;
      2. Loss of protections under FSMA for any investment activity as a result of the communication in (a) above; and
      3. If any transaction resulting from the above falls within the jurisdiction of any dispute resolution or compensation scheme or if there is no such scheme then confirmation of that fact; or
  4. Unsolicited real time communications to ‘knowledgeable’ customers (‘KC’), with a KC being someone the AIFM has;
    • reasonable grounds to believe understands the risks of engaging in the proposed investment activity; and
    • the KC has already been informed of the following:
      1. Loss of protections under UK Financial Services and Markets Act (‘FSMA’) for this type of communication;
      2. Loss of protections under FSMA for any investment activity as a result of the communication in (a) above;
      3. If any transaction resulting from the above falls within the jurisdiction of any dispute resolution or compensation scheme or if there is no such scheme then confirmation of that fact; and
      4. The KC had sufficient time to consider the above information and clearly signified he understood the warnings and accepted that he would not benefit from the protections.

The financial promotion restriction is a prohibition on communicating an invite or inducing another to engage in investment activity. This is not defined, but the FCA has issued guidance on how to interpret it.

The FCA considers communications with a "promotional element" to constitute a financial promotion. Essentially, the test the FCA applies is whether a reasonable observer would consider that the communicator intended to persuade or incite the recipient to engage in investment activity.

There are different types of financial promotion: real time, non-real time, solicited or unsolicited. These distinctions are important, as the available exemptions can depend on the type of communication.

Generally, a person cannot undertake financial promotions in the UK without first being authorised by the FCA or Prudential Regulation Authority ("PRA"). However, there are a number of exemptions available under the financial promotions regime, which are particularly relevant for sub-threshold AIFMs.

Under the financial promotions regime, a sub-threshold EEA AIFM may lawfully make an invitation or inducement to engage in an investment activity by addressing it specifically to certain types of persons. If the person does not fit within those categories, the AIFM may breach the financial promotion restriction.

For relevant exemptions refer to FSMA 2000 (Financial Promotions order) 2005 (Investment Professionals) Articles 19 and 48-51.

No fees apply for marketing an EU sub-threshold AIFM under the financial promotions regime.

Pre-Brexit, sub-threshold EEA AIFMs can market in the UK via the financial promotions regime, they do not need to register with the FCA or any other authority in the UK. As such, no fees or ongoing requirements are applicable. There are no continuing obligations.

Post-Brexit, the AIFM will be classified as a Small third country AIFM. At this time the AIFM will need to notify the FCA in writing before marketing an AIF managed by it. The AIFM will need to confirm responsibility for compliance with the marketing provisions together with any information the FCA may request for e.g. main instruments in which the AIFM trades and details of its principal exposures and concentrations to enable the FCA to monitor systemic risk effectively.

Effect of Brexit

There are two potential outcomes in respect of Brexit: Deal or no deal. In a deal situation, a transitional period will be implemented. During this period the current rules will continue to apply.

If there is no-deal, the UK will implement its temporary permissions regime. This is relevant for full-scope EEA AIFMs, but not for sub-threshold EEA AIFMs. Sub-threshold EEA AIFMs will simply become third-country small AIFMs, and will need to follow the UK's national private placement regime.

Pre-Marketing

It is possible to "pre-market" into the UK, but care should be taken not to confuse this with pre-marketing under the AIFMD. As noted above, the AIFMD marketing regime and financial promotions regime are distinct.

Provided the activity does not amount to an invitation or inducement to engage in investment activity, the activity is permitted. In any event, if the communication is directed at investment professionals or another class of person that is exempt from the financial promotion restriction, the activity should be acceptable.

It should be noted that the use of third party marketing agents (such as distribution/placement agents) cannot circumvent the requirements of AIFM Directive. The definition captures any marketing „on behalf of the AIFM" who will ultimately be responsible for compliance with the AIFM Directive by such agents.

Marketing for AIFM Directive purposes means any offering or placement of shares/units in AIF's at the initiative of the AIFM to or with EU investors.Pre-marketing is not marketing per-se, marketing takes place at the point of offering /or placement and activities up to that point are not marketing.

In accordance with AIFM Directive and FCA guidance, prescribed documentation and information should be in materially final form before the AIFM can apply for permission to market an AIF. Therefore, any communications relating to draft documentation would not fall within the meaning of an „offer" or „placement" for the purposes of the Directive as the AIFM cannot apply for permission to market the AIF at this point.

In the post-Brexit environment, activities immediately prior to actually marketing will trigger any relevant National Private Placement Rules. On the basis of FCA's guidance, "pre-marketing" or "soft-circling" include the steps preparatory to marketing including raising the profile of the manager's platform, and discussing with prospective cornerstone investors the terms upon which they might be prepared to commit to a future fund, without making available finalised or near-final fund constitutional documents or offering documents).

On the basis of the FCA's guidance, the following activities would likely constitute "pre-marketing" only:

  • a fund manager sending a communication to investors in its current fund informing them, as part of a general update on that fund, of its intention to raise a successor fund;
  • a fund manager providing general information on a fund manager's business (i.e. strategy, team and track record), without referencing a specific fund product;
  • a fund manager providing general information on a fund manager's business (i.e. strategy, team and track record) with only high level references to a specific fund product;
  • an oral conversation about a potential fund with no written materials being provided;
  • a fund manager granting access to a data room containing diligence materials in respect of the fund manager and its prior funds, but not including the LPA and PPM for the fund being raised; and
  • a fund manager providing a presentation regarding a fund but not a formal offering document (such as a private placement memorandum).

Pre-marketing may take place even once the AIF has been legally established. No marketing filing is possible as long as the AIF has not been legally established.

Two sets of UK financial services laws are relevant to the pre-marketing of AIF interests. They are:

  • the general restriction on making "financial promotions"; and
  • the prohibition on carrying on "regulated activities" in the UK by way of business without authorisation from the PRA or FCA.

The restriction on financial promotions is detailed above. Breach of the UK's financial promotion restriction may be a criminal offence and/or lead to rescission of investor commitments.

Regarding the prohibition on carrying on regulated activities in the UK, under section 19 of the UK's Financial Services and Markets Act 2000, unauthorised firms (i.e. firms which are not authorised by either the PRA or FCA) must not carry on regulated activities by way of business in the UK. The regulated activities which are likely to be relevant to a fund manager promoting or marketing fund interests in the UK are:

  • "advising on investments"; and
  • "arranging (bringing about) deals in investments" and/or "making arrangements with a view to transactions in investments" (together, "arranging deals").

In order for a fund manager to avoid being construed as providing investment advice to prospective UK investors, all prospective UK investors should be invited expressly in writing to take their own independent investment, tax, legal and regulatory advice as they think fit (and the fund manager must not, in fact, advise expressly or implicitly on the merits of subscribing for interests in the fund).

"Arranging deals" is a very broad activity. Doing anything more than making a mere financial promotion (see above) could amount to this regulated activity. Generally, the activity of "arranging deals" is considered to be carried on in the place where the relevant person is at the time they make the arrangements. Therefore, a fund manager can arrange deals freely when all relevant natural person officers or employees are physically outside the UK. If individuals travel to the UK, however, there is a risk that the arranging deals activity could be carried on in the UK by the fund manager.

Conducting a presentation in the UK regarding the fund manager's platform and its products and services generally is unlikely to amount to the regulated activity of arranging deals in the UK. Moreover, although the position is not entirely clear, the better view is that a pitch presentation using a slide deck in relation to a particular AIF currently being promoted/marketed is unlikely to amount to the regulated activity of "arranging deals". A fundraising deck is likely to be seen as a financial promotion and not marketing material under the AIFM Directive.

Reverse Solicitation

Marketing for the purposes of AIFM Directive („Directive") means any offering or placement of shares/units in AIF's at the initiative of the AIFM or on behalf of the AIFM to or with EU investors. Therefore, by implication the definition does not capture reverse solicitation or passive marketing. In the event that a potential investor approaches an AIFM about investing in an AIF without any prior solicitation by the AIFM, this would not amount to marketing in accordance with the Directive.

The FCA provides little guidance on what constitutes "reverse solicitation /or passive marketing", if the AIFM can show evidence that an offering /or placement was made at the investors initiative, (provided it is a Professional investor), and the confirmation is obtained prior to an offer /or placement taking place, then this should suffice. However, the AIFM will need adequate controls to demonstrate that EU investors have invested in an AIF on this basis. The AIFM must ensure that reverse solicitation or/passive marketing is not used to circumvent the requirements of the Directive.

The information in our toolbox provides managers of private equity or venture capital funds with an initial overview of certain framework conditions in the respective country. It does not provide advice on the law of any country, neither does it substitute such advice. Before marketing a fund into the respective country, it is at all times necessary to seek expert advice. Our team is happy to assist you with all questions at any time.

In collaboration with: MJ Hudson